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Traders See Little Solace for Pound in Orderly No-Deal Brexit

(Bloomberg) -- For foreign-exchange traders, a no-deal Brexit is bound to sink the pound no matter what protections are put in place to mitigate immediate financial risks.

As lawmakers hit gridlock over Prime Minister Theresa May’s proposed withdrawal accord, some have suggested Britain could leave the European Union without a divorce deal in hand and take steps to control and contain the fallout.

“I don’t buy that all,” said Russell Silberston, a money manager at Investec Asset Management. “There is no majority whatsoever for a no-deal. If it were, it would be a disaster for U.K. assets, the pound would go down 5-to-10 percent.” Silberston says he has a a position that would benefit from a stronger pound on conviction that the two sides will eventually reach a deal.

The Bloomberg British Pound Index is already headed for a third monthly drop as U.K. politicians threaten to reject the Brexit deal that’s taken 18 months to negotiate. And while both sides are looking at contingency plans, the EU will rule out doing mini deals to ease the chaos of a no-deal situation, instead taking unilateral steps to protect its interests, a person familiar with the bloc’s plans said.

A “managed” scenario could help mitigate the worst of the losses for the pound, said Neil Jones, head of hedge-fund currency sales at Mizuho Bank. But even then, sterling may drop to $1.20 in such a situation, while plummeting to $1.10 in a disorderly exit, he said.

The pound traded around $1.2640 on Tuesday.

To be sure, there has been little clarity on what agreements or procedures would be part of a “managed” no-deal scenario, making it difficult for strategists to embrace it with any hint of optimism.

“As one commentator said, it is just a ‘no-deal’ with ‘managed’ in front of it,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander. “That implies a no-deal and the forex market won’t like it, with the pound risking at least a 7% drop.”